Supply Chain

Management
Chapter 3
Supply Chain Drivers and
Metrics
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 Outline
Drivers of supply chain performance
A framework for structuring drivers
Facilities
Inventory
Transportation
Information
Sourcing
Pricing
Obstacles to achieving fit
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 Drivers of Supply Chain Performance
Facilities
places where inventory is stored, assembled, or fabricated
production sites and storage sites
Inventory
raw materials, WIP, finished goods within a supply chain
inventory policies
Transportation
moving inventory from point to point in a supply chain
combinations of transportation modes and routes
Information
data and analysis regarding inventory, transportation, facilities throughout
the supply chain
potentially the biggest driver of supply chain performance
Sourcing
Choice of who will perform a particular supply chain activity like production,
storage, transportation, ot the management of information
Pricing
How much firm will charge for goods & services that it makes available in
the supply chain
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 A Framework for
Structuring Drivers
Efficiency Responsiveness

Supply chain structure

Logistical Drivers

Facilities Transportation Inventory

Information Sourcing Pricing

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Cross- functional Drivers
 Supply Chain Decisions:
Structuring Drivers

Strategy
(Design)

Planning

Operation

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 Facilities
Role in the supply chain
– the “where” of the supply chain
– manufacturing or storage (warehouses)
Role in the competitive strategy
– economies of scale (efficiency priority)
– larger number of smaller facilities
(responsiveness priority)
Example 3.1: Toyota and Honda
Components of facilities decisions
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 Components of Facilities
Decisions
Location
– centralization (efficiency) vs. decentralization
(responsiveness)
– other factors to consider (e.g., proximity to customers)
Capacity (flexibility versus efficiency)
Manufacturing methodology (product focused versus
process focused)
Warehousing methodology (SKU storage, job lot storage,
cross-docking)
Overall trade-off: Responsiveness versus efficiency

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 Facility Metrics
Capacity: max. amount a facility can process
Utilization: fraction of capacity being utilized
Theoretical flow/cycle time of production: measures
the time required to process a unit if there are absolutely
no delays at any stage
Actual average flow/ cycle time: actual average time
taken for all units over a specified time
Flow time efficiency: ratio of the theoritical flow time to
the actual avg. flow time.
Product Variety: measures the no. of products/product
families processed in a facility
Volume contribution of top 20 percent SKUs and
customers
Processing/setup/down/idle time
Average production batch size
Production service level
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 Inventory
Role in the supply chain
Role in the competitive strategy
Components of inventory decisions

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 Inventory: Role in the Supply
Chain
Inventory exists because of a mismatch between supply and
demand
Source of cost and influence on responsiveness
Impact on
– material flow time: time elapsed between when material
enters the supply chain to when it exits the supply chain
– throughput
rate at which sales to end consumers occur
I = RT (Little’s Law)
I = inventory; R = throughput; T = flow time
Inventory and throughput are “synonymous” in a supply
chain

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 Inventory: Role in Competitive
Strategy
If responsiveness is a strategic
competitive priority, a firm can locate
larger amounts of inventory closer to
customers
If cost is more important, inventory can be
reduced to make the firm more efficient
Trade-off

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 Components of Inventory
Decisions
Cycle inventory
– Average amount of inventory used to satisfy demand between
shipments
– Depends on lot size
Safety inventory
– inventory held in case demand exceeds expectations
– costs of carrying too much inventory versus cost of losing sales
Seasonal inventory
– inventory built up to counter predictable variability in demand
– cost of carrying additional inventory versus cost of flexible
production
Overall trade-off: Responsiveness versus efficiency
– more inventory: greater responsiveness but greater cost
– less inventory: lower cost but lower responsiveness
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 Inventory- Metrics
Average inventory
Products with more than a specified number
of days of inventory
Average replenishment batch size
Average safety inventory
Seasonal Inventory
Fill rate: fraction of orders/demand that were
met on time from inventory for a specified
period
Fraction of time out of stock
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 Transportation
Role in the supply chain
Role in the competitive strategy
Components of transportation decisions

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 Transportation: Role in
the Supply Chain
Moves the product between stages in the
supply chain
Impact on responsiveness and efficiency
Faster transportation allows greater
responsiveness but lower efficiency
Also affects inventory and facilities

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 Transportation:
Role in the Competitive Strategy
If responsiveness is a strategic competitive
priority, then faster transportation modes can
provide greater responsiveness to customers
who are willing to pay for it
Can also use slower transportation modes
for customers whose priority is price (cost)
Can also consider both inventory and
transportation to find the right balance

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 Components of
Transportation Decisions
Mode of transportation:
– air, truck, rail, ship, pipeline, electronic
transportation
– vary in cost, speed, size of shipment, flexibility
Route and network selection
– route: path along which a product is shipped
– network: collection of locations and routes
In-house or outsource
Overall trade-off: Responsiveness versus
efficiency
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 Transportation Metrics
Average inbound transportation cost
Average incoming shipment size
Average inbound transportation cost per
shipment
Average outbound trans. Cost
Average outbound shipment size
Average outbound trans. Cost per shipment
Fraction transported by mode

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 Information
Role in the supply chain
Role in the competitive strategy
Components of information decisions

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 Information: Role in
the Supply Chain
The connection between the various
stages in the supply chain – allows
coordination between stages
Crucial to daily operation of each stage in
a supply chain – e.g., production
scheduling, inventory levels

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 Information:
Role in the Competitive Strategy
Allows supply chain to become more
efficient and more responsive at the same
time (reduces the need for a trade-off)
Information technology
What information is most valuable?

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 Components of Information
Decisions
Push (MRP) versus pull (demand information transmitted
quickly throughout the supply chain)
Coordination and information sharing
Forecasting and aggregate planning
Enabling technologies
– EDI
– Internet
– ERP systems
– Supply Chain Management software
Overall trade-off: Responsiveness versus efficiency

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 Information Metrics
Forecast Horizon
Frequency of update
Forecast error
Seasonal factors
Variance from plan
Ratio of demand variability to order
variability

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 Sourcing
Role in Supply Chain
Which product inhouse or outsource?
Single or multiple suppliers?
On what criteria?
Role in competitive strategy
Outsource to responsive parties or add
capacity

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Components of Sourcing Decisions
Inhouse or outsource
Supplier selection
Procurement

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 Sourcing Metrics
Days payable outstanding
Average purchase price
Range of purchase price
Average purchase quantity
Fraction on-time deliveries
Supply quality
Supply lead time

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 Pricing
Role in a Supply chain
Pricing plays as a lever to match supply or
demand
Role in competitive strategy
Regulation of responsiveness & efficiency

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 Components of Pricing
Pricing & Economies of scale : Quantity
discounts must be consistent with
economies of scale
Everyday low price versus High-Low
pricing
Fixed price versus Menu pricing: Amazon
.com has menu pricing for various
customers while MRO suppliers prefer
fixed price

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 Pricing Metrics
Profit Margin
Days sales outstanding
Incremental fixed cost per order
Incremental variable cost per order
Average sales price
Average order size
Range of sale price
Range of periodic sales

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 Obstacles to Achieving
Strategic Fit
Increasing variety of products
Decreasing product life cycles
Increasingly demanding customers
Fragmentation of supply chain ownership
Globalization
Difficulty executing new strategies

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Major Obstacles to Achieving Fit
Multiple owners / incentives in a supply
chain

Local optimization and lack of global fit

Increasing product variety / shrinking life

cycles / customer fragmentation
Increasing implied uncertainty

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 Summary
What are the major drivers of supply chain
performance?
What is the role of each driver in creating strategic
fit between supply chain strategy and competitive
strategy (or between implied demand uncertainty
and supply chain responsiveness)?
What are the major obstacles to achieving
strategic fit?
In the remainder of the course, we will learn how
to make decisions with respect to these drivers in
order to achieve strategic fit and surmount these
obstacles
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